Depository Services: Basics to Benefits

Updated: May 26 2002, 05:30am hrs
Technology is revolutionising every field of human endeavour and activity, especially in the capital markets. A major development has been the setting up of depository services. The objective of a depository is to provide for the maintenance/transfer of ownership records of securities in an electronic form and scripless trading in the stock exchanges, thereby reducing settlement risks. The Securities and Exchange Board of India (Sebi) has granted registration to two depositories -- the National Securities Depository Limited (NSDL) and the Central Depository Services (India) Limited (CDSL) under the Depository Act (1996). This provided the capital markets with superior technology, complex securities processing and rock solid accounting and portfolio management system.

CDSL was inaugurated on July 15, 1999. It is promoted by The Stock Exchange, Mumbai, in association with the State Bank of India (SBI), Bank of India, Bank of Baroda and HDFC Bank. NSDL is promoted by the Industrial Development Bank of India, Unit Trust of India and the National Stock Exchange. Subsequently, SBI also acquired a stake in NSDL. NSDL commenced operations in October 1996 while CDSL did so in early 1999.

The rapid growth in numbers, volumes and value of securities exposed the limitation of handling and dealing in securities in physical mode; the shortcomings were manifest in bad deliveries, delays in transfer and irregular settlement etc. The depository bought in solutions for all these problems.

Stock Exchanges Connected to the Depositories for Demat Trading
National Stock Exchange
The Stock Exchange Mumbai (BSE)
Calcutta Stock Exchange
Delhi Stock Exchange
Ludhiana Stock Exchange
Bangalore Stock Exchange
Over the counter Exchange of India
Madras Stock Exchange
Interconnected Stock Exchange
Ahmedabad Stock Exchange
A depository is an organisation where the securities of an investor are held in electronic form and carries out the securities transaction by book entry. It can be compared to a bank for shares. Just as a bank holds cash in your account and provides all services related to transaction of cash, a depository holds securities in electronic form and provides all services related to transaction of shares/debt instruments. A depository interacts with clients through a Depository Participant (DP) with whom the client has to maintain a demat account. Thus, an investor who wishes to avail of all depository services has to open a demat account with a DP.

The depository participant is an agent of the depository and is authorised to offer depository services to investors. According to Sebi guidelines, financial institutions, banks, custodians, stock brokers can become depository participants. Once you have opened an account with a depository participant, you can buy or sell shares in the electronic form, provided the seller/buyer also holds shares in the electronic form. You can sell the shares in the depository mode through any share broker (member of any stock exchange, which provides demat trading, & settlement). All you need to do is to provide details of your account with the DP, with a delivery instruction to debit your share account with the number of shares sold by you. When you buy shares in the depository mode, you must, similarly, inform the broker about your depository account details so that the shares bought would be credited to your account with the DP.

Dematerialisation is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic format and credited in the investor’s account with his depository participant.

The process of dematerialisation is as follows:

1) Initially you have to submit your demat request form and share certificate to DP.

2) DP will check whether securities are available for demat. The investor must deface the share certificate by stamping "surrendered for dematerialisation" and DP will punch two holes on the name of company and will draw two parallel lines across the face of certificate.

3) The DP enters the demat requests in their system to be sent to depository and forwards the request to registrar and transfer agent (RTA) or issuer (ie the company whose shares are sought to be dematerialised).

4) RTA/company on receiving the physical documents and the electronic request verifies and checks them. Once the RTA/company finds that the document in order, dematerialisation of the securities concerned is electronically confirmed to the depository. Depository credits the dematerialised securities to the beneficiary account of the investor and intimates the DP electronically. The DP issues a statement of transaction to the client.

The benefits of a demat account are as follows:

1) Protection against loss, theft, forgery, mutilation etc

2) Immediate transfer of shares

3) Shorter settlement cycles

4) Protection against bad deliveries

5) No stamp duty

6) Minimum paperwork

7) Minimum costs

Free Balance: Only the balances shown under this heading are eligible for transfer, pledge, dematerialisation and securities lending.

Pending Dematerialisation: The balances shown under this heading are lying with the company concerned and/or their registrars pending credit to your demat account. Please note that no transactions can be put through on these balances.

Pending Rematerialisation: The balances shown under this heading are lying with the company concerned and/or their registrars for providing you the physical certificates. Please note that no transactions can be put through on these balances.

The balances shown under this column are under pledge to a third party. Please note that the pledges have been marked in favour of the third party on the basis of your written instructions. Also, please note that no transactions can be put through on these balances.

Procedure for purchase of dematerialised shares: The procedure for buying dematerialised shares is very similar to the procedure for buying physical securities. Investor has the option to give one-time standing instruction or separate instruction every time in the prescribed format. You can purchase securities from any of the stock exchanges connected to depository through a broker, broker will take payments from you.

The broker arranges payment to the clearing corporation and receives credit of securities in clearing account on the payout day. Then, the broker gives instruction to DP to debit clearing account and credit client’s account. After this instruction, the investor receives shares into his account. You should ensure that the broker transfers the securities purchased to his account before the book closure. If the securities remain in broker’s account, the company may give corporate benefits to broker. In this case you have to collect benefits from your broker. An individual can open as many beneficiary accounts with one or more depository participants.

There is no minimum balance required to be maintained in your demat account. One can receive shares allotted in IPOs directly in your demat account. Bonus/rights/conversion (of debentures) shares can be directly credited to the depository account.

Rematerialisation: If you opt to ‘rematerialise’ the shares, it will be converted from the electronic form to paper form. To insure safety in the whole conversion process, Sebi has the following guidelines:

1) For becoming a "DP" networth criteria, Sebi approval, etc, are mandatory.

2) DP cannot effect any debit or credit in the demat account of the investor without the valid authorisation of the investor.

3) Regular reconciliation between DP and depositories.

4) Periodic inspection by depositories of the office of DP and registrar (RTA).

5) All investors have a right to receive their statement of accounts periodically from the DP.

6) In the depository system, the depository holds the investor account on faith. Therefore, if the DP goes bankrupt, the creditors of the DP will have no access to the holdings in the name of the clients of DP. These investors can transfer their holdings to an account held with another DP.

7) Compulsory internal audits of operations of DP by practicing company secretary or chartered accountant every quarter.

8) Various procedures for back-up and safekeeping of data at all levels.

NSDL charges a minimum fee of Rs 15 per debit transaction, which means the seller will have to pay Rs 15 for every deal, irrespective of the amount. In addition, NSDL also charges a Rs 0.75 custody fee per entry per month, equivalent to Rs 9 per year. CDSL has proposed to charge a fee of 0.01 per cent, subject to a minimum of Rs 5 and maximum of Rs 12, per debit deal. CDSL has also kept a Rs 100 monthly fee per depository participant or the actual bill for a month, which ever is higher. NSDL is still leading with around 80 per cent market share. CDSL charges less than NDSL. These charges, sometimes restrict small investor to opt for depository services.

By RR Information and Investment Research (P) Ltd